By: Mitzi Carletti

The current housing market has made it challenging to own the home of your dreams. In many markets, the “good old days” of contingency clauses and negotiated closing dates are ancient history. Bidding wars appear to be the new normal and this change has created the need for a quick and creative way to come up with the cash before your current home is sold.

Traditional bridge loans

Historically, bridge loans have been the most common way to finance a new home before your existing home is sold. However, less costly and more streamlined solutions are available and worth investigating. Bridge loans can be laden with fees and paperwork and may not be the fastest way to access funds. Securities-backed lines of credit (SBLOCs) and margin loans are more flexible alternatives and may be a good solution for you.

Securities-backed lines of credit

Most securities firms offer SBLOCs. SBLOCs allow you to borrow money using the securities in your account as collateral and the rates are usually lower than a traditional loan. In addition, these loans are more flexible than traditional term loans which have a stated maturity date and a fixed repayment schedule. With a SBLOC, you are required to make monthly interest-only payments but can repay the loan at any time and on your own schedule. These loans are structured very similarly to a home equity line of credit, but your investment portfolio is the collateral rather than your home. 

To set up a SBLOC, you must enter into a contract with the securities firm. The contract will state the maximum amount you may borrow, and you agree to use your investment account as collateral. If the value of your securities declines to an amount that is no longer sufficient to support the line of credit, you will be notified to either post additional collateral or repay the loan. The firm has the right to liquidate securities to bring the loan in conformation with the agreement which may result in tax consequences for you. Therefore, it is important to not borrow to the maximum level and leave a cushion of available credit in case of a market decline.

Using margin to bridge the gap

Margin loans may provide an even more timely solution to access cash than SBLOCs. With a margin loan, the borrower’s investment accounts are also the collateral for the loan. Typically, brokerage firms will lend up to 50% of the value of the qualified securities that are held outside of a retirement account. This type of financing is only recommended for short-term loans because changes in market values and margin ratio requirements may occur and are out of the borrower’s control. As with SBLOCs, the firm has the right to liquidate securities when the margin ratio has been violated and could also result in unintended tax issues. It is recommended to not borrow more than 30% of the value of the portfolio to help prevent such a scenario.  

There are several advantages of using a margin loan versus a traditional loan. When you borrow from your investment account, there are no closing costs, no property appraisals required and no prepayment penalties. In fact, you do not even need to make monthly interest payments (although interest will accrue on the unpaid interest).

To set up a margin account, you must sign a margin agreement with the brokerage firm which outlines the borrowing limits and the interest rates to be charged.  

It is important to note that interest rates charged to the borrower for both SBLOCs and margin accounts can vary between custodians. In many cases, the rates decrease as the loan amount increases. The interest rate charged may be negotiable and worth discussing with your investment adviser.

What is best for you?

You have options. So, do your research and discuss this with your trusted advisers to find the solution that is best for you. The current housing market will continue to evolve, and your professional advisers can help navigate the “new normal” to secure financing for the next home of your dreams.